OSI Tumbles on Possible Contract Ban for Chinese Parts

Dec. 9 (Bloomberg) -- OSI Systems Inc. fell as much as 40
percent, the biggest intraday drop ever, after lawmakers said
the company may face a ban on U.S. contracts for using
unapproved Chinese-made parts in baggage-screening equipment.

The disclosure came after the Transportation Security
Administration canceled a $60 million order last week. The TSA
has resumed an effort to bar OSI’s Rapiscan Systems unit from
future contracts, Representatives Michael McCaul, a Texas
Republican, and Bennie Thompson, a Mississippi Democrat, said in
a letter dated Dec. 6.

“TSA has strict requirements that all vendors must meet
for security effectiveness and efficiency and does not tolerate
any violation of contract obligations,” David Castelveter, a
spokesman, said in an e-mail. “TSA is responsible for the
safety and security of the nearly two million travelers screened
each day.”

Shares fell 26.8 percent to $47.38 at 4 p.m. in New York.
Earlier, they were at $39.00, lowest since October 2011. Trading
volume was 7.94 million shares, 60 times the three-month
average.

OSI’s security division, which includes its work for the
TSA, generated 46 percent of the company’s revenue in the last
fiscal year, according to a 10-K filing dated Aug. 16.

The contract raises questions about whether the unapproved
component made the Rapiscan machines vulnerable to sabotage or
espionage, the lawmakers said. The House Homeland Security
Committee, as part of a congressional investigation, asked the
TSA for documents relating to communications between the company
and the government.

Chinese Part

Ajay Vashishat, OSI Systems’ vice president for business
development, didn’t respond to an e-mail and phone call seeking
comment.

A part in the machines made under the canceled contract was
manufactured in China, OSI Systems said in a news release today
explaining why the TSA ended an order signed less than three
months ago.

OSI Systems, based in Hawthorne, California, said the
company didn’t get TSA’s approval for the part, violating its
contract. The part made by Shanghai Advanced Non-Destructive
Testing was “effectively an X-ray light bulb” and didn’t
contain software, Chief Executive Officer Deepak Chopra said in
the statement.

TSA Review

TSA is in the process of completing a thorough review in
advance of a final decision on proceeding with debarment,
Castelveter said. The agency will respond directly to the
lawmakers, he said.

The equipment in the canceled contract isn’t used to
physically screen passengers, Castelveter said. The agency
hasn’t identified any degradation of security or impact on
operational performance from the Rapiscan violations, he said.

Rapiscan averted debarment by the Department of Homeland
Security last year over accusations it misled the TSA about
testing of updated body-scanning machines. The company, in its
10-K, said Homeland Security could start debarment proceedings
again if Rapiscan failed to live up to an agreement signed in
June.

OSI had hundreds of the body-scanning machines removed from
U.S. airports earlier this year after the TSA concluded the
company couldn’t meet a congressional deadline to make their
revealing images more generic.

The company in June agreed with Homeland Security officials
to hire new executives and reassign five senior managers.
Rapiscan denied accusations by Representative Mike Rogers, an
Alabama Republican, that it fabricated software tests.

Since fiscal 2009, OSI Systems has received $463 million in
U.S. government contracts, according to data compiled by
Bloomberg. The company received $267 million in Department of
Homeland Security work over the same period.